FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8864
USG CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3329400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
As of April 30, 1994, 45,057,595 shares of USG common stock were outstanding.
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months Ended March 31, 1994 and 1993
Consolidated Balance Sheet:
As of March 31, 1994 and December 31, 1993
Consolidated Statement of Cash Flows:
Three Months Ended March 31, 1994 and 1993
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Report of Independent Public Accountants
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
<CAPTION>
Three Months Three Months
ended ended
March 31, March 31,
1994 (a) 1993
<S> <C> <C>
Net Sales $ 506 $ 436
Cost of products sold 396 357
Gross Profit 110 79
Selling and administrative expenses 57 52
Amortization of excess reorganization value 42 -
Operating Profit 11 27
Interest expense 37 75
Interest income (3) (2)
Other expense, net 1 7
Reorganization items - 69
Loss Before Taxes on Income and Changes in
Accounting Principles (24) (122)
Taxes on income 10 7
Loss Before Changes in Accounting Principles (34) (129)
Cumulative effect of changes in accounting principles, net - (150)
Net Loss (34) (279)
Average number of common shares (b) 39,134,246
Net Loss Per Common Share (b) $ (0.87)
Dividends paid per common share (b) -
(a) Due to the Restructuring and implementation of fresh start accounting, financial statements
after May 6, 1993 for the restructured company are not comparable to financial statements
prior to that date. See "Notes to Consolidated Financial Statements - Note (3)" for more
information on the Restructuring and implementation of fresh start accounting.
(b) Common shares and per share data for periods prior to May 7, 1993 are omitted because, due
to the Restructuring and implementation of fresh start accounting, they are not meaningful.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<CAPTION>
As of As of
March 31, December 31,
1994 1993
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 334 $ 211
Receivables (net of reserves - 1994 $13; 1993 $13) 289 264
Inventories 165 145
Total current assets 788 620
Property, Plant and Equipment (net of reserves for
depreciation and depletion - 1994 $47; 1993 $36) 747 754
Excess Reorganization Value (net of accumulated
amortization - 1994 $155; 1993 $113) 688 735
Other Assets 164 54
Total assets 2,387 2,163
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 120 $ 104
Accrued expenses 210 208
Notes payable 13 2
Long-term debt maturing within one year 118 165
Taxes on income 18 20
Total current liabilities 479 499
Long-Term Debt 1,257 1,309
Deferred Income Taxes 187 180
Other Liabilities 413 309
Stockholders' Equity/(Deficit):
Preferred stock - -
Common stock 5 4
Capital received in excess of par value 223 -
Deferred currency translation (14) (9)
Reinvested earnings/(deficit) (163) (129)
Total stockholders' equity/(deficit) 51 (134)
Total liabilities and stockholders' equity 2,387 2,163
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<CAPTION>
Three Months Three Months
ended ended
March 31, March 31,
1994 (a) 1993
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (34) $ (279)
Adjustments to reconcile net loss to net cash:
Amortization of excess reorganization value 42 -
Cumulative effect of accounting changes - 150
Depreciation, depletion and other amortization 18 18
Interest expense on pay-in-kind debentures - 17
Deferred income taxes 7 3
Net loss on asset dispositions - 4
(Increase)/decrease in working capital:
Receivables (25) (33)
Inventories (21) (7)
Payables 15 14
Accrued expenses 2 16
Increase in other assets (9) (7)
Increase in other liabilities 4 4
Increase in reorganization items - 55
Other, net - (6)
Net cash flows to operating activities (1) (51)
Cash Flows From Investing Activities:
Capital expenditures (7) (8)
Net cash flows to investing activities (7) (8)
Cash Flows From Financing Activities:
Issuance of debt 114 1
Repayment of debt (207) (2)
Proceeds from public offering of common stock 224 -
Decrease in restricted assets - 1
Net cash flows from financing activities 131 -
Net Increase/(Decrease) in Cash
and Cash Equivalents 123 (59)
Cash and cash equivalents as of beginning
of period 211 180
Cash and cash equivalents as of end of period 334 121
Supplemental Cash Flow Disclosures:
Interest paid 22 46
Income taxes paid 4 2
(a) Due to the Restructuring and implementation of fresh start accounting, financial statements
after May 6, 1993 for the restructured company are not comparable to financial statements
prior to that date. See "Notes to Consolidated Financial Statements - Note (3)" for more
information on the Restructuring and implementation of fresh start accounting.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
USG CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(1) The consolidated financial statements of USG Corporation and its
subsidiaries ("the Corporation") included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements reflect all
adjustments, which are of a normal recurring nature, necessary to
present fairly the Corporation's financial position as of March 31, 1994
and December 31, 1993; results of operations for the three months ended
March 31, 1994 and 1993; and cash flows for the three months then ended.
While these interim financial statements and accompanying notes are
unaudited, they have been reviewed by Arthur Andersen & Co., the
Corporation's independent public accountants. These financial
statements are to be read in conjunction with the financial statements
and notes included in the Corporation's 1993 Annual Report on Form 10-K
dated March 14, 1994.
(2) In the first quarter of 1994, the Corporation implemented a refinancing
plan which included (i) a public offering of common stock (the "Equity
Offering"), (ii) the placement of senior notes with certain
institutional investors (the "Note Placement") and (iii) certain
amendments to the Corporation's Credit Agreement (the "Credit Agreement
Amendments" and, together with the Equity Offering and the Note
Placement, the "Transactions").
In March 1994, the Equity Offering was completed. Of the 14,375,000
shares of common stock sold at a price of $29.875 per share, 7,900,000
shares were newly issued by the Corporation and 6,475,000 shares were
sold by Water Street Corporate Recovery Fund I, L.P. (the "Selling
Stockholder"). Net proceeds received by the Corporation from the Equity
Offering were $224 million. The Corporation did not receive any
proceeds from the sale of shares by the Selling Stockholder. The shares
of common stock sold in the Equity Offering were registered under the
Corporation's Registration Statement No. 33-52573 which was declared
effective by the Securities and Exchange Commission (the "SEC") on March
9, 1994.
In February 1994, the Corporation completed the Note Placement with the
issuance of $150 million principal amount of 9 1/4% senior notes due
2001 (the "Senior 2001 Notes") in exchange for $30 million aggregate
principal amount of its outstanding 8% senior notes due 1996 (the
"Senior 1996 Notes"), $35 million aggregate principal amount of its
outstanding 8% senior notes due 1997 (the "Senior 1997 Notes") and $85
million in cash.
In conjunction with the Equity Offering and Note Placement, the Credit
Agreement Amendments were completed. These amendments increased the
size of the Corporation's revolving credit facility by $70 million and
amended mandatory bank term loan prepayment provisions to allow the
Corporation, upon the achievement of certain financial tests, to retain
additional free cash flow for capital expenditures and repayment of its
public debt.
The net proceeds from the Equity Offering and Note Placement, along with
$158 million of excess cash as of December 31, 1993 (as calculated in
accordance with the cash sweep mechanism of the Corporation's credit
agreement) are being used by the Corporation to prepay, redeem or
repurchase public and bank debt and for general corporate purposes,
including capital expenditures for cost reduction, capacity improvement
and future growth opportunities. In the first quarter of 1994, the
Corporation (i) prepaid $140 million of bank term loans in satisfaction
of 1997 and 1998 scheduled payments, (ii) purchased $26 million
aggregate principal amount of Senior 1996 Notes and $20 million
aggregate principal amount of Senior 1997 Notes and (iii) delivered
notices of redemption, at 100% of principal amount, of $75 million of
its 8% senior notes due 1995 (the "Senior 1995 Notes") and $35 million
of its 9% senior notes due 1998 (the "Senior 1998 Notes").
(3) On May 6, 1993, the Corporation completed a comprehensive restructuring
of its debt (the "Restructuring") through the implementation of a
"prepackaged" plan of reorganization (the "Prepackaged Plan"). In
accordance with the terms of the Prepackaged Plan, $1.4 billion of debt
and accrued interest was converted into equity, interest expense was
significantly reduced and the maturities of a substantial portion of its
remaining debt were extended. The Corporation accounted for the
Restructuring using the principles of fresh start accounting as required
by AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to
such principles, individual assets and liabilities were adjusted to fair
market value as of May 6, 1993. Excess reorganization value, the
portion of the reorganization value not attributable to specific assets,
is being amortized over a five-year period, effective May 7, 1993. In
August 1993, the Corporation completed an exchange offer that converted
$138 million of bank debt into senior notes due 2002. See the
Corporation's 1993 Annual Report of Form 10-K dated March 14, 1994 for
more information on the Restructuring, implementation of fresh start
accounting and exchange of senior notes for bank debt.
Due to the Restructuring and implementation of fresh start reporting,
financial statements after May 6, 1993 for the restructured company are
not comparable to financial statements prior to that date. For year-to-
year comparability of results, the following unaudited Pro Forma
Consolidated Statement of Earnings for the three months ended March 31,
1993 has been prepared giving effect to the consummation of the
Prepackaged Plan including the costs related thereto, in accordance with
SOP 90-7, as if the consummation had occurred on January 1, 1993. The
adjustments set forth under the caption "Pro Forma Adjustments" reflect
the assumed effects of the Restructuring and the adoption of fresh start
reporting prescribed by SOP 90-7.
<PAGE>
<TABLE>
USG CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
Three Months ended March 31, 1993
(unaudited)
(Dollars in millions)
<CAPTION>
Total
Before Pro Forma
Adjustments Adjustments Pro Forma
<S> <C> <C> <C>
Net sales $ 436 $ - $ 436
Cost of products sold 357 - 357
Gross profit 79 - 79
Selling and administrative expenses 52 - 52
Amortization of excess
reorganization value - 43 (a) 43
Operating profit/(loss) 27 (43) (16)
Interest expense 75 (42) (b) 33
Interest income (2) - (2)
Other expense, net 7 (1) (c) 6
Reorganization items 69 (69) (d) -
Earnings/(loss) before taxes on
income, extraordinary gain and
changes in accounting principles (122) 69 (53)
Taxes on income 7 (5) 2
Earnings/(loss) before
extraordinary gain and changes
in accounting principles (129) 74 (55)
(a) Reflects amortization of excess reorganization value which would have been recorded
during the first quarter of 1993.
(b) Reflects the adjustment to restate interest expense for the first quarter of 1993 to
the amount that would have been recorded.
(c) Represents the reversal of first quarter 1993 amortization of historical capitalized
financing costs which were written off in connection with the Restructuring.
(d) Represents the reversal of actual reorganization items incurred in connection with
the Restructuring in the first quarter of 1993. These expenses would have been
recorded in 1992 had the Restructuring occurred on January 1, 1993.
</TABLE>
(4) A one-time after-tax charge of $150 million was recorded in the first
quarter of 1993 representing the adoption of: (i) Statement of Financial
Accounting Standard ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," - $180 million expense;
and (ii) SFAS No. 109, "Accounting for Income Taxes," - $30 million
income. Neither of these standards impact cash flow.
(5) Income tax expense amounted to $10 million for the first quarter of 1994
due to tax expense on foreign subsidiary earnings and the inability to
benefit the amortization of excess reorganization value and the domestic
net operating loss carryforwards ("NOL Carryforwards"). For the first
quarter of 1993, income tax expense was $7 million due to tax expense on
foreign subsidiary earnings and the inability to benefit the NOL
Carryforwards as an offset to deferred taxes.
The Corporation has an NOL Carryforward of $90 million remaining from
1992. This NOL Carryforward may be used to offset U.S. taxable income
through 2007. The Internal Revenue Code (the "Code") will limit the
Corporation's annual use of its NOL Carryforward to the lesser of its
taxable income or approximately $30 million plus any unused limit from
prior years. Furthermore, due to the uncertainty regarding the
application of the Code to the exchange of stock for debt, the
Corporation's NOL Carryforward could be further reduced or eliminated.
The Corporation has a $4 million minimum tax credit which may be used to
offset U.S. regular tax liability in future years.
(6) As permitted by the Prepackaged Plan, 2,788,350 common shares were
reserved for future issuance in conjunction with stock options, all of
which remained in reserve as of March 31, 1994. Options for 1,673,000
common shares and 933,000 common shares were granted on June 1, 1993 and
February 9, 1994, respectively, leaving an additional 182,350 common
shares available for future grants.
(7) One of the Corporation's operating subsidiaries, United States Gypsum
Company ("U.S. Gypsum"), is a defendant in asbestos lawsuits alleging
both property damage and personal injury. This litigation has not had a
material effect on the Corporation's liquidity or earnings. Virtually
all costs of the Personal Injury Cases are being paid by insurance.
However, many of U.S. Gypsum's insurance carriers are denying coverage
for the Property Damage Cases, although U.S. Gypsum believes that
substantial coverage exists and the trial court in U.S. Gypsum's
Coverage Action has so ruled (such ruling has been appealed). In view
of the limited insurance funding currently available to U.S. Gypsum for
Property Damage Cases resulting from continued resistance by a number of
U.S. Gypsum's insurers to providing coverage, the effect of the asbestos
litigation on the Corporation will depend upon a variety of factors,
including the damages sought in Property Damage Cases that reach trial
prior to the completion of the Coverage Action, U.S. Gypsum's ability to
successfully defend or settle such cases, and the resolution of the
Coverage Action. As a result, management is unable to determine whether
an adverse outcome in the asbestos litigation will have a material
adverse effect on the results of operations or the consolidated
financial position of the Corporation.
Effective January 1, 1994, the Corporation adopted the requirements of
Financial Accounting Standards Board Interpretation No. 39. In
accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual
of $100 million for its liabilities for asbestos-related matters which
are deemed probable and can be reasonably estimated, and separately
recorded an asset of $100 million, the amount of such liabilities that
is expected to be paid by uncontested insurance. Due to management's
inability to reasonably estimate U.S. Gypsum's liability for Property
Damage Cases and (until the implementation of Georgine et al. v. Amchem
Products In., et al is deemed probable) future Personal Injury Cases,
the liability and asset recorded relate only to pending Personal Injury
Cases. The implementation of Interpretation No. 39 did not impact
earnings, cash flow or net assets. See Part II, Item 1. "Legal
Proceedings" for information on asbestos litigation and definitions of
capitalized terms.
The Corporation and certain of its subsidiaries have been notified by
state and federal environmental protection agencies of possible
involvement as one of numerous "potentially responsible parties" in a
number of so-called "Superfund" sites in the United States. The
Corporation does not presently anticipate any material adverse effect
upon its earnings or consolidated financial position arising out of the
resolution of these matters or any other pending governmental proceeding
regarding environmental matters.
(8) USG Corporation, a holding company, owns several operating subsidiaries,
including U.S. Gypsum. On January 1, 1985, all of the issued and
outstanding shares of stock of U.S. Gypsum were converted into shares of
USG Corporation and the holding company became a joint and several
obligor for certain debentures originally issued by U.S. Gypsum.
Debentures totaling $32 million and $36 million were on the holding
company's books of account as of March 31, 1994 and December 31, 1993,
respectively. Summary financial results for U.S. Gypsum are presented
below (dollars in millions):
<PAGE>
<TABLE>
<CAPTION>
Three Months Three Months
ended ended
March 31, March 31,
Summary Statement of Earnings 1994 (a) 1993
<S> <C> <C>
Net Sales $ 269 $ 223
Cost and expenses 224 201
Amortization of excess reorganization value 15 -
Operating profit 30 22
Interest expense, net - -
Corporate charges 24 39
Loss before taxes on income and change in
accounting principle 6 (17)
Income tax/(tax benefit) 9 (6)
Loss before change in accounting principle (3) (11)
Cumulative effect of change in accounting principle - 28
Net loss (3) 17
</TABLE>
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
Summary Balance Sheet 1994 1993
<S> <C> <C>
Current assets $ 213 $ 190
Property, plant and equipment, net 480 483
Excess reorganization value, net 250 265
Other assets 106 3
Total assets 1,049 941
Current liabilities 137 124
Other liabilities and obligations 247 149
Stockholder's equity 665 668
Total liabilities and stockholder's equity 1,049 941
(a) Due to the Restructuring and implementation of fresh start accounting, financial
statements after May 6, 1993 for the restructured company are not comparable to
financial statements prior to that date. See "Notes to Consolidated Financial
Statements - Note (3)" for more information on the Restructuring and implementation
of fresh start accounting.
</TABLE>
<PAGE>
(9) The Corporation issued $478 million aggregate principal amount of
10 1/4% senior notes due 2002 (the "10 1/4% Senior Notes") in 1993.
Each of U.S. Gypsum, USG Industries, Inc., USG Interiors, Inc. ("USG
Interiors"), USG Foreign Investments, Ltd., L&W Supply Corporation ("L&W
Supply"), Westbank Planting Company, USG Interiors International, Inc.,
American Metals Corporation and La Mirada Products Co., Inc. (together,
the "Combined Guarantors") guaranteed, in the manner described below,
the obligations of the Corporation under the Credit Agreement and the
10 1/4% Senior Notes. The Combined Guarantors are jointly and severally
liable under the guarantees. Holders of the debt issued in connection
with the Credit Agreement (the "Bank Debt") have the right to: (i)
determine whether, when and to what extent the guarantees will be
enforced (provided that each guarantee payment will be applied to the
Bank Debt and 10 1/4% Senior Notes pro rata based on the respective
amounts owed thereon); and (ii) amend or eliminate the guarantees. The
guarantees will terminate when the Bank Debt is retired regardless of
whether the 10 1/4% Senior Notes remain outstanding. The liability of
each of the Combined Guarantors on its guarantee is limited to the
greater of: (i) 95% of the lowest amount, calculated as of July 13,
1988, sufficient to render the guarantor insolvent, leave the guarantor
with unreasonably small capital or leave the guarantor unable to pay its
debts as they become due (each as defined under applicable law); and
(ii) the same amount, calculated as of the date any demand for payment
under such guarantee is made, in each case plus collection costs. The
guarantees are senior obligations of the applicable guarantor and rank
pari passu with all unsubordinated obligations of the guarantor.
There are 43 Non-Guarantors (the "Combined Non-Guarantors"),
substantially all of which are subsidiaries of Guarantors. The Combined
Non-Guarantors primarily include CGC Inc. ("CGC"), the Corporation's
76%-owned Canadian subsidiary, Gypsum Transportation Limited, USG
Canadian Mining Ltd. and the Corporation's Mexican, European and Pacific
subsidiaries managed by USG International, Ltd. ("USG International").
The long-term debt of the Combined Non-Guarantors of $25 million as of
March 31, 1994 has restrictive covenants that restrict, among other
things, the payment of dividends.
The following condensed consolidating information presents:
(i) Condensed financial statements as of March 31, 1994
and December 31, 1993 and for the three months ended
March 31, 1994 and 1993 of (a) the Corporation on a
parent company only basis (the "Parent Company," which
was the only entity of the Corporation included in the
1993 bankruptcy proceeding associated with the
Restructuring), (b) the Combined Guarantors, (c) the
Combined Non-Guarantors and (d) the Corporation on a
consolidated basis. (Due to the Restructuring and
implementation of fresh start accounting, the
financial statements after May 6, 1993 for the
restructured company are not comparable to financial
statements prior to that date. Except for the
following condensed financial statements, separate
financial information with respect to the Combined
Guarantors is not deemed material to investors and is
omitted.)
(ii) The Parent Company and Combined Guarantors shown with
their investments in their subsidiaries accounted for
on the equity method.
(iii) Elimination entries necessary to consolidate the
Parent Company and its subsidiaries.
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
Three Months ended March 31, 1994
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 443 $ 88 $ (25) $ 506
Gross Profit - 92 18 - 110
Operating Profit/(Loss) (9) 21 (1) - 11
Equity in net loss of the
Subsidiaries 32 4 - (36) -
Interest expense, net 33 - 1 - 34
Corporate service charge (42) 42 - - -
Other expense, net 1 - - - 1
Loss Before Taxes on Income (33) (25) (2) 36 (24)
Taxes on income 1 7 2 - 10
Net Loss (34) (32) (4) 36 (34)
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
Three Months ended March 31, 1993
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 369 $ 85 $ (18) $ 436
Gross Profit/(Loss) - 61 18 - 79
Operating Profit (8) 27 8 - 27
Equity in net (earnings)/loss
of the Subsidiaries 11 (4) - (7) -
Interest expense, net 70 2 1 - 73
Corporate service charge (69) 69 - - -
Other expense, net 2 5 - - 7
Reorganization items 69 - - - 69
Earnings/(Loss) Before Taxes
on Income and Changes in
Accounting Principles (91) (45) 7 7 (122)
Taxes on income/(income tax
benefit) 17 (12) 2 - 7
Earnings/(Loss) Before Changes
in Accounting Principles (108) (33) 5 7 (129)
Changes in accounting principles (171) 22 (1) - (150)
Net Earnings/(Loss) (279) (11) 4 7 (279)
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 1994
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 310 $ (12) $ 36 $ - $ 334
Receivables, net 6 270 45 (32) 289
Inventories - 130 38 (3) 165
Total current assets 316 388 119 (35) 788
Property, Plant and
Equipment, Net 21 615 111 - 747
Investment in Subsidiaries 1,475 267 - (1,742) -
Excess Reorganization Value, Net - 548 140 - 688
Other Assets (10) 169 14 (9) 164
Total assets 1,802 1,987 384 (1,786) 2,387
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
expenses 106 217 55 (30) 348
Notes payable and LTD maturing
within one year 110 3 18 - 131
Total current liabilities 216 220 73 (30) 479
Long-Term Debt 1,197 35 25 - 1,257
Deferred Income Taxes 23 149 15 - 187
Other Liabilities 301 108 4 - 413
Stockholders' Equity/(Deficit):
Common stock 5 1 6 (7) 5
Capital received in excess
of par value 223 1,472 310 (1,782) 223
Deferred currency translation - - (14) - (14)
Reinvested earnings/(deficit) (163) 2 (35) 33 (163)
Total stockholders' equity/
(deficit) 65 1,475 267 (1,756) 51
Total liabilities and
stockholders' equity 1,802 1,987 384 (1,786) 2,387
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 1993
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 187 $ (8) $ 32 $ - $ 211
Receivables, net 8 240 44 (28) 264
Inventories - 114 34 (3) 145
Total current assets 195 346 110 (31) 620
Property, Plant and
Equipment, Net 21 620 113 - 754
Investment in Subsidiaries 1,511 277 - (1,788) -
Excess Reorganization Value, Net - 582 153 - 735
Other Assets (35) 91 3 (5) 54
Total assets 1,692 1,916 379 (1,824) 2,163
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
expenses 100 207 52 (27) 332
Notes payable and LTD maturing
within one year 158 3 6 - 167
Total current liabilities 258 210 58 (27) 499
Long-Term Debt 1,249 36 24 - 1,309
Deferred Income Taxes 14 151 15 - 180
Other Liabilities 296 8 5 - 309
Stockholders' Equity/(Deficit):
Common stock 4 1 6 (7) 4
Capital received in excess
of par value - 1,472 310 (1,782) -
Deferred currency translation - - (9) - (9)
Reinvested earnings/(deficit) (129) 38 (30) (8) (129)
Total stockholders' equity/
(deficit) (125) 1,511 277 (1,797) (134)
Total liabilities and
stockholders' equity 1,692 1,916 379 (1,824) 2,163
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months ended March 31, 1994
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Cash Flows (To)/From
Operating Activities $ (23) $ 17 $ 5 $ - $ (1)
Capital expenditures - (6) (1) - (7)
Net proceeds from asset
dispositions - - - - -
Net Cash Flows To
Investing Activities - (6) (1) - (7)
Issuance of debt 85 - 29 - 114
Repayment of debt (189) - (18) - (207)
Proceeds from public
offering of stock 224 - - - 224
Cash dividends (paid)/
received - 11 (11) - -
Net cash transfers (to)/from
Corporate 26 (26) - - -
Net Cash Flows (To)/From
Financing Activities 146 (15) - - 131
Net Increase/(Decrease) in Cash
and Cash Equivalents 123 (4) 4 - 123
Cash and cash equivalents at
beginning of period 187 (8) 32 - 211
Cash and cash equivalents at
end of period 310 (12) 36 - 334
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 1993
(Dollars amounts in millions)
<CAPTION>
Combined
Parent Combined Non-
Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Cash Flows (To)/From
Operating Activities $ (72) $ 17 $ 4 $ - $ (51)
Capital expenditures - (6) (2) - (8)
Net proceeds from asset
dispositions - - - - -
Net Cash Flows To
Investing Activities - (6) (2) - (8)
Issuance of debt - - 1 - 1
Repayment of debt - - (2) - (2)
Cash dividends (paid)/
received 1 - (1) - -
Decrease in
restricted assets - 1 - - 1
Net cash transfers (to)/from
Corporate 65 (65) - - -
Net Cash Flows (To)/From
Financing Activities 66 (64) (2) - -
Net Decrease in Cash and
Cash Equivalents (6) (53) - - (59)
Cash and cash equivalents at
beginning of period 59 87 34 - 180
Cash and cash equivalents at
end of period 53 34 34 - 121
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
On May 6, 1993, the Corporation completed the Restructuring. Due to the
Restructuring and implementation of fresh start accounting, the Corporation's
financial statements after May 6, 1993 are not comparable to financial
statements prior to that date. See Part I, Item 1. "Financial Statements:
Notes to Consolidated Financial Statements - Note (3)" for information on the
Restructuring and implementation of fresh start accounting.
To facilitate a meaningful comparison of the Corporation's operating
performance, the following discussion and analysis is presented on a
traditional basis. Included in the following discussion are comparisons of
EBITDA (earnings before interest, taxes, depreciation, depletion and
amortization, and for the first quarter of 1993, reorganization items and
changes in accounting principles). The Corporation believes EBITDA is helpful
in understanding cash flow generated from operations that is available for
taxes, debt service and capital expenditures. In addition, EBITDA facilitates
the monitoring of covenants related to certain long-term debt and other
agreements entered into in conjunction with the Restructuring. EBITDA should
not be considered by investors as an alternative to net earnings as an
indicator of the Corporation's operating performance or to cash flows as a
measure of its overall liquidity.
<PAGE>
<TABLE>
Consolidated Results (dollars in millions):
<CAPTION>
Three Months ended
March 31
1994 1993
<S> <C> <C>
Net Sales $ 506 $ 436
Gross Profit 110 79
% of net sales 21.7% 18.1%
Selling and administrative expenses 57 52
% of net sales 11.3% 11.9%
Amortization of excess reorganization value 42 -
Operating Profit 11 27
Calculation of EBITDA:
Operating profit $ 11 $ 27
Amortization of excess reorganization value 42 -
Depreciation and depletion 13 15
Other - 4
EBITDA 66 46
% of net sales 13.0% 10.6%
</TABLE>
Consolidated net sales in the first quarter of 1994, the highest first quarter
amount since the first quarter of 1988, increased $70 million, or 16.1%, over
the first quarter of 1993. The increase was attributable to increased sales
for nearly all of the Corporation's operating subsidiaries.
As a percentage of net sales, gross profit in first quarter, 1994, improved to
21.7% from 18.1% in the 1993 period, reflecting improved gypsum wallboard
prices.
Selling and administrative expenses increased $5 million, or 9.6%, in the
first three months of 1994 over the comparable 1993 period, primarily due to
higher levels of compensation and benefits and marketing program expenses. As
a percentage of net sales, however, these expenses improved to 11.3% from
11.9% in the first quarter of 1993 as a result of the increase in 1994 net
sales.
Effective May 7, 1993, the Corporation began amortizing its excess
reorganization value which was established in accordance with fresh start
accounting rules. This non-cash amortization, which will continue through
April 1998, amounted to $42 million in the first three months of 1994 with no
counterpart in the prior year quarter. Consequently, 1994 operating profit is
not comparable to the prior year.
EBITDA in the first quarter of 1994 increased $20 million, or 43.5%, over the
comparable 1993 period reflecting the aforementioned gross profit performance.
<PAGE>
Industry Segment/Core Business Results:
The Corporation has two core businesses - North American Gypsum (which
includes the Gypsum Products and Building Products Distribution industry
segments) and Worldwide Ceilings. First quarter comparisons of results by
operating company, industry segment and core business were as follows (in
millions of dollars):
<TABLE>
<CAPTION>
Three Months ended March 31
Net Sales EBITDA
1994 1993 1994 1993
<S> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum $ 269 $ 223 $ 53 $ 29
CGC (gypsum division) 24 23 2 2
Other subsidiaries 19 17 5 6
Eliminations (18) (14) - -
Total Gypsum Products 294 249 60 37
Building Products Distribution 139 113 1 -
Eliminations (45) (36) - -
Total North American Gypsum 388 326 61 37
Worldwide Ceilings:
USG Interiors 96 84 13 11
USG International 45 43 1 1
CGC (interiors division) 8 8 1 2
Eliminations (9) (9) - -
Total Worldwide Ceilings 140 126 15 14
Corporate - - (10) (5)
Eliminations (22) (16) - -
Total USG Corporation 506 436 66 46
</TABLE>
North American Gypsum
Net sales and EBITDA for North American Gypsum increased in the first quarter
of 1994 $62 million, or 19.0%, and $24 million, or 64.9%, respectively, from
the first quarter of 1993.
Net sales and EBITDA for U.S. Gypsum continue to improve as a result of
increased demand and improving prices. In the first quarter of 1994, net
sales increased $46 million, or 20.6%, over first quarter 1993. EBITDA in the
1994 period was up $24 million, or 82.8%, over the first quarter of 1993.
These improvements primarily reflect continued improvement in gypsum wallboard
selling prices and increased volume. Despite unfavorable weather conditions
in several parts of the United States, U.S. Gypsum shipped 1.865 billion
square feet of gypsum wallboard in the first quarter of 1994, the highest
first quarter amount in its history and 5.6% higher than shipments in the
first three months of 1993. U.S. Gypsum's gypsum wallboard plants ran at 98%
of capacity in the first quarter of 1994. The average gypsum wallboard
selling price increased to $89.53 per thousand square feet in the first
quarter of 1994, up $14.56, or 19.4%, from the first quarter of 1993 and up
$7.07, or 8.6%, from the fourth quarter of 1993. First quarter 1994 shipping
records of joint compound and DUROCK cement board also contributed to U.S.
Gypsum's favorable results.
Increased selling prices were partially offset by increased unit manufacturing
cost in the first quarter of 1994, up approximately 6% over the first quarter
of 1993. The increased unit manufacturing cost resulted primarily from
increased energy costs related to adverse weather and increased maintenance
costs.
First quarter 1994 net sales for CGC's gypsum division increased $1 million,
or 4.3%, over the comparable 1993 quarter due to increased volume of gypsum
wallboard, which was partially offset by the impact of the strengthened U.S.
dollar. EBITDA in the first quarter of 1994 remained unchanged from the prior
year period.
Building Products Distribution (L&W Supply) experienced a record first quarter
net sales of $139 million, increasing $26 million, or 23.0%, over the first
three months of 1993. This increase reflects improved gypsum wallboard volume
and selling prices, as well as improved results for its ceilings, joint
treatment and other non-wallboard product lines. EBITDA increased $1 million
for the 1994 quarter over 1993's breakeven level.
Worldwide Ceilings
Net sales and EBITDA for Worldwide Ceilings increased in the first quarter of
1994 $14 million, or 11.1%, and $1 million, or 7.1%, respectively from the
first quarter of 1993.
Compared to the first quarter of 1993, net sales and EBITDA for USG Interiors
increased $12 million, or 14.3%, and $2 million, or 18.2%, respectively, in
the first quarter of 1994 due to higher levels of retail and export sales.
These results represent USG Interiors' highest first quarter sales since the
first quarter of 1990 despite the continued softness in new non-residential
construction markets.
Despite the continuing recession in Europe, sales in the first quarter of 1994
for USG International increased $2 million, or 4.7%, over the first quarter of
1993, while EBITDA remained unchanged for the two periods.
Other Consolidated Earnings Information
Interest expense, which was significantly reduced as a result of the
Restructuring, amounted to $37 million in the first quarter of 1994, down $38
million, or 50.7% from the first quarter 1993 level of $75 million. The 1994
amount includes $4 million of non-cash amortization of reorganization debt
discount.
In connection with the Restructuring, reorganization items expense of $69
million was recorded in the first quarter of 1993, representing fees and
expenses associated with the Restructuring and the write-off of capitalized
financing costs incurred in 1988.
Income tax expense amounted to $10 million in the first quarter of 1994
primarily due to the inability to benefit the amortization of excess
reorganization value. In the first quarter of 1993, income tax expense
amounted to $7 million.
A one-time after-tax charge of $150 million was recorded in the first quarter
of 1993 representing the adoption of: (i) SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," - $180 million expense; and
(ii) SFAS No. 109, "Accounting for Income Taxes," - $30 million income.
Neither of these standards impact cash flow.
A net loss of $34 million was recorded in the first quarter of 1994 primarily
due to the aforementioned amortization of excess reorganization value and
reorganization debt discount. Together, these non-cash adjustments reduced
net earnings by $46 million, or $1.17 per common share. In the year-earlier
period, a net loss of $279 million was recorded as a result of the high level
of interest expense and one-time charges related to reorganization items and
the net cumulative effect of changes in accounting principles.
Liquidity and Capital Resources
In the first quarter of 1994, the Corporation implemented a refinancing plan
which included (i) the Equity Offering, (ii) the Note Placement and (iii) the
Credit Agreement Amendments. The Transactions were designed, among other
things, to (i) reduce the Corporation's financial leverage through the
retirement of debt, (ii) reduce the amount of debt maturing in 1995 through
1998 and extend the final maturity of a significant portion of the
Corporation's debt, (iii) improve the Corporation's financial and operating
flexibility under the Credit Agreement and (iv) provide funds for capital
expenditures and other general corporate purposes, including capital
expenditures for cost reduction, capacity improvement and future growth
opportunities. Through use of proceeds from the Transactions and cash
generated in 1993, the Corporation has reduced its domestic debt by
approximately $220 million (net of the Note Placement) as of April 30, 1994.
See Part I, Item 1. "Financial Statements: Notes to Consolidated Financial
Statements - Note (2)" for additional information on the Transactions.
The Corporation's liquidity and capital resources were significantly
strengthened by the Transactions. The Corporation believes that cash
generated by operations and the estimated levels of liquidity available to the
Corporation will be sufficient to permit the Corporation to satisfy its debt
service requirements and other capital requirements for the foreseeable
future. However, the Corporation is subject to significant business, economic
and competitive uncertainties that are beyond its control and there can be no
assurance that the Corporation's financial resources will be sufficient for it
to satisfy its debt service obligations and other capital requirements under
all circumstances or otherwise permit the Corporation to take advantage of any
appropriate growth opportunity that may arise.
Working Capital
As of March 31, 1994, working capital (current assets less current
liabilities) amounted to $309 million and the ratio of current assets to
current liabilities was 1.65 to 1, versus December 31, 1993 when working
capital amounted to $121 million and the ratio of current assets to current
liabilities was 1.24 to 1.
In the first quarter of 1994, cash and cash equivalents increased $123 million
to $334 million, primarily due to implementation of the aforementioned
refinancing in the first quarter of 1994. As of March 31, 1994, the
Corporation planned to utilize approximately $190 million of existing cash to
prepay or redeem additional debt.
Comparing March 31, 1994 balances with December 31, 1993, accounts receivable
(net) increased $25 million, or 9.5%, to $289 million, inventories increased
$20 million, or 13.8%, to $165 million and accounts payable increased $16
million, or 15.4%, to $120 million. These increases were primarily due to the
increased level of business.
Capital Expenditures
Capital expenditures amounted to $7 million in first quarter 1994, a decrease
of $1 million from the comparable 1993 period. As a result of the
aforementioned refinancing plan, which generated approximately $92 million for
capital expenditures, the Corporation augmented its capital spending program.
As of March 31, 1994, capital expenditure commitments for the replacement,
modernization and expansion of operations amounted to $40 million compared
with $11 million as of December 31, 1993. In addition, the Corporation
periodically evaluates possible acquisitions or combinations involving other
businesses or companies, generally in businesses and markets related to the
Corporation's current operations, and the Corporation believes that its
available liquidity would be adequate to support any appropriate opportunity.
Litigation
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. This litigation
has not had a material effect on the Corporation's liquidity or earnings.
Virtually all costs of the Personal Injury Cases are being paid by insurance.
However, many of U.S. Gypsum's insurance carriers are denying coverage for the
Property Damage Cases, although U.S. Gypsum believes that substantial coverage
exists and the trial court in U.S. Gypsum's Coverage Action has so ruled (such
ruling has been appealed). In view of the limited insurance funding currently
available to U.S. Gypsum for Property Damage Cases resulting from continued
resistance by a number of U.S. Gypsum's insurers to providing coverage, the
effect of the asbestos litigation on the Corporation will depend upon a
variety of factors, including the damages sought in Property Damage Cases that
reach trial prior to the completion of the Coverage Action, U.S. Gypsum's
ability to successfully defend or settle such cases, and the resolution of the
Coverage Action. As a result, management is unable to determine whether an
adverse outcome in the asbestos litigation will have a material adverse effect
on the results of operations or the consolidated financial position of the
Corporation.
Effective January 1, 1994, the Corporation adopted the requirements of
Financial Accounting Standards Board Interpretation No. 39. In accordance
with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million
for its liabilities for asbestos-related matters which are deemed probable and
can be reasonably estimated, and separately recorded an asset of $100 million,
the amount of such liabilities that is expected to be paid by uncontested
insurance. Due to management's inability to reasonably estimate U.S. Gypsum's
liability for Property Damage Cases and (until the implementation of Georgine
is deemed probable) future Personal Injury Cases, the liability and asset
recorded in 1994 relate only to pending Personal Injury Cases. The
implementation of Interpretation No. 39 did not impact earnings, cash flow or
net assets.
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as one
of numerous "potentially responsible parties" in a number of so-called
"Superfund" sites in the United States. The Corporation believes that neither
these matters nor any other known governmental proceeding regarding
environmental matters will have a material adverse effect upon its earnings or
consolidated financial position. See Part II, Item 1. "Legal Proceedings" for
more information on legal proceedings.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of March 31, 1994,
and the related condensed consolidated statement of earnings and the condensed
consolidated statement of cash flows for the three-month period ended March
31, 1994. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
As discussed in Note 3, on May 6, 1993, the Corporation completed a
comprehensive financial restructuring through the implementation of a
prepackaged plan of reorganization under Chapter 11 of Title 11 of the United
States Bankruptcy Code and applied fresh start accounting. As such, results
of operations through May 6, 1993 are not comparable with results of
operations subsequent to that date.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
As discussed in Note 7, in view of the limited insurance funding currently
available for property damage cases resulting from the continued resistance by
a number of U.S. Gypsum's insurers to providing coverage, the effect of the
asbestos litigation on the Corporation will depend upon a variety of factors,
including the damages sought in property damage cases that reach trial prior
to the completion of the coverage action, U.S. Gypsum's ability to
successfully defend or settle such cases, and the resolution of the coverage
action. As a result, management is unable to determine whether an adverse
outcome in the asbestos litigation will have a material adverse effect on the
consolidated results of operations or the consolidated financial position of
the Corporation.
As discussed in Note 7, on January 1, 1994, the Corporation changed its method
of accounting for asbestos-related matters.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
April 22, 1994
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Asbestos Litigation
One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous
defendants in lawsuits arising out of the manufacture and sale of asbestos-
containing building materials. U.S. Gypsum sold certain asbestos-containing
products beginning in the 1930's; in most cases the products were discontinued
or asbestos was removed from the product formula by 1972, and no asbestos-
containing products were sold after 1977. Some of these lawsuits seek to
recover compensatory and in many cases punitive damages for costs associated
with maintenance or removal and replacement of products containing asbestos
(the "Property Damage Cases"). Others of these suits (the "Personal Injury
Cases") seek to recover compensatory and in many cases punitive damages for
personal injury allegedly resulting from exposure to asbestos and asbestos-
containing products. It is anticipated that additional personal injury and
property damage cases containing similar allegations will be filed.
As discussed below, U.S. Gypsum has substantial personal injury and property
damage insurance for the years involved in the asbestos litigation. Prior to
1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S.
Gypsum purchased comprehensive general liability insurance policies covering
personal injury and property damage in an aggregate face amount of
approximately $850 million. Insurers that issued approximately $106 million
of these policies are presently insolvent. After deducting insolvencies and
exhaustion of policies, approximately $625 million of insurance remains
potentially available. Because U.S. Gypsum's insurance carriers initially
responded to its claims for defense and indemnification with various theories
denying or limiting coverage and the applicability of their policies, U.S.
Gypsum filed a declaratory judgment action against them in the Circuit Court
of Cook County, Illinois on December 29, 1983. (U.S. Gypsum Co. v. Admiral
Insurance Co., et al.) (the "Coverage Action"). U.S. Gypsum alleges in the
Coverage Action that the carriers are obligated to provide indemnification for
settlements and judgments and, in some cases, defense costs incurred by U.S.
Gypsum in property damage and personal injury claims in which it is a
defendant. The current defendants are ten insurance carriers that provided
comprehensive general liability insurance coverage to U.S. Gypsum between the
1940's and 1984. As discussed below, several carriers have settled all or a
portion of the claims in the Coverage Action.
U.S. Gypsum's aggregate expenditures for all asbestos-related matters,
including property damage, personal injury, insurance coverage litigation and
related expenses, exceeded aggregate insurance payments by $10.9 million in
1991, $25.8 million in 1992, and $8.2 million in 1993.
Property Damage Cases
The Property Damage Cases have been brought against U.S. Gypsum by a variety
of plaintiffs, including school districts, state and local governments,
colleges and universities, hospitals and private property owners. U.S. Gypsum
is one of many defendants in four cases that have been certified as class
actions and others that request such certification. One class action suit is
brought on behalf of owners and operators of all elementary and secondary
schools in the United States that contain or contained friable asbestos-
containing material. (In re Asbestos School Litigation, U.S.D.C., E.D. Pa.)
Approximately 1,350 school districts opted out of the class, some of which
have filed or may file separate lawsuits or are participants in a state court
class action involving approximately 333 school districts in Michigan. (Board
of Education of the City of Detroit, et al. v. The Celotex Corp., et al.,
Circuit Court for Wayne County, Mich.) On April 10, 1992, a state court in
Philadelphia certified a class consisting of all owners of buildings leased to
the federal government. (Prince George Center, Inc. v. U.S. Gypsum Co., et
al., Court of Common Pleas, Philadelphia, Pa.) On September 4, 1992, a
Federal district court in South Carolina conditionally certified a class
comprised of all colleges and universities in the United States, which
certification is presently limited to the resolution of certain allegedly
"common" liability issues. (Central Wesleyan College v. W.R. Grace & Co., et
al., U.S.D.C. S.C.). On December 23, 1992, a case was filed in state court in
South Carolina purporting to be a "voluntary" class action on behalf of owners
of all buildings containing certain types of asbestos-containing products
manufactured by the nine named defendants, including U.S. Gypsum, other than
buildings owned by the federal or state governments, single family residences,
or buildings at issue in the four above-described class actions (Anderson
County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas, Hampton
Co., S.C. (the "Anderson Case"). An amended complaint, which adds the
Corporation as a defendant, alleges, among other things, that the guarantees
executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well
as subsequent distributions of cash from U.S. Gypsum to the Corporation,
rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. The
suit seeks to set aside the guarantees and recover the value of the cash flow
"diverted" from U.S. Gypsum to the Corporation in an amount to be determined.
This case has not been certified as a class action and no other threshold
issues, including whether the South Carolina Courts have personal
jurisdiction over the Corporation, have been decided. The damages claimed
against U.S. Gypsum in the class action cases are unspecified. U.S. Gypsum
has denied the substantive allegations of each of the Property Damage Cases
and intends to defend them vigorously except when advantageous settlements are
possible.
As of March 31, 1994, 53 Property Damage Cases were pending against U.S.
Gypsum; however, the number of buildings involved is greater than the number
of cases because many of these cases, including the class actions referred to
above, involve multiple buildings. In addition, approximately 42 property
damage claims have been threatened against U.S. Gypsum.
In total, U.S. Gypsum has settled property damage claims of approximately 198
plaintiffs involved in approximately 82 cases. Twenty-five cases have been
tried to verdict, 16 of which were won by U.S. Gypsum and 6 lost; two other
cases, one won at the trial level and one lost, were settled during appeals.
Another case that was lost at the trial court level was reversed on appeal and
remanded to the trial court, which has now entered judgment for U.S. Gypsum.
Appeals are pending in 5 of the tried cases. In the cases lost, compensatory
damage awards against U.S. Gypsum have totaled $11.5 million. Punitive
damages totalling $5.5 million were entered against U.S. Gypsum in four
trials. Two of the punitive damage awards, totalling $1.45 million, were paid
after appeals were exhausted; a third was settled after the verdict was
reversed on appeal. The remaining punitive damage award is on appeal.
In 1991, 13 new Property Damage Cases were filed against U.S. Gypsum, 11 were
dismissed before trial, 8 were settled, 2 were closed following trial or
appeal, and 100 were pending at year-end. U.S. Gypsum expended $22.2 million
for the defense and resolution of Property Damage Cases and received insurance
payments of $13.8 million in 1991. During 1992, 7 new Property Damage Cases
were filed against U.S. Gypsum, 10 were dismissed before trial, 18 were
settled, 3 were closed following trial or appeal, and 76 were pending at year-
end. U.S. Gypsum expended $34.9 million for the defense and resolution of
Property Damage Cases and received insurance payments of $10.2 million in
1992. In 1993, 5 new Property Damage Cases were filed against U.S. Gypsum, 7
were dismissed before trial, 11 were settled, 1 was closed following trial or
appeal, 2 were consolidated into 1, and 61 were pending at year-end. U.S.
Gypsum expended $13.9 million for the defense and resolution of Property
Damage Cases and received insurance payments of $7.6 million in 1993.
In the Property Damage Cases litigated to date, a defendant's liability for
compensatory damages, if any, has been limited to damages associated with the
presence and quantity of asbestos-containing products manufactured by that
defendant which are identified in the buildings at issue, although plaintiffs
in some cases have argued that principles of joint and several liability
should apply. Because of the unique factors inherent in each of the Property
Damage Cases, including the lack of reliable information as to product
identification and the amount of damages claimed against U.S. Gypsum in many
cases, including the class actions described above, management is unable to
make a reasonable estimate of the cost of disposing of pending Property Damage
Cases.
Personal Injury Cases
U.S. Gypsum was among numerous defendants in asbestos personal injury suits
and administrative claims involving approximately 53,000 claimants pending as
of March 31, 1994. All asbestos bodily injury claims pending in the federal
courts, including approximately one-third of the Personal Injury Cases pending
against U.S. Gypsum, have been consolidated in the United States District
Court for the Eastern District of Pennsylvania.
U.S. Gypsum is a member, together with 19 other former producers of asbestos-
containing products, of the Center for Claims Resolution (the "Center"). The
Center has assumed the handling, including the defense and settlement, of all
Personal Injury Cases pending against U.S. Gypsum and the other members of the
Center. Each member of the Center is assessed a portion of the liability and
defense costs of the Center for the Personal Injury Cases handled by the
Center, according to predetermined allocation formulas. Five of U.S. Gypsum's
insurance carriers that in 1985 signed an Agreement Concerning Asbestos-
Related Claims (the "Wellington Agreement") are supporting insurers (the
"Supporting Insurers") of the Center. The Supporting Insurers are obligated
to provide coverage for the defense and indemnity costs of the Center's
members pursuant to the coverage provisions in the Wellington Agreement.
Claims for punitive damages are defended but not paid by the Center; if
punitive damages are recovered, insurance coverage may be available under the
Wellington Agreement depending on the terms of particular policies and
applicable state law. Punitive damages have not been awarded against U.S.
Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's
personal injury liability and defense costs are paid by those of its insurance
carriers that are Supporting Insurers. The Supporting Insurers provided
approximately $350 million of the total coverage referred to above, of which
approximately $262 million remains unexhausted.
On January 15, 1993, U.S. Gypsum and the other members of the Center were
named as defendants in a class action filed in the U.S. District Court for the
Eastern District of Pennsylvania (Georgine et al. v. Amchem Products Inc., et
al., Case No. 93-CV-0215) (hereinafter "Georgine," formerly known as
"Carlough"). The complaint generally defines the class of plaintiffs as all
persons who have been occupationally exposed to asbestos-containing products
manufactured by the defendants and who had not filed an asbestos personal
injury suit as of the date of the filing of the class action. Simultaneously
with the filing of the class action, the parties filed a settlement agreement
in which the named plaintiffs, proposed class counsel, and the defendants
agreed to settle and compromise the claims of the proposed class. The
settlement, if approved by the court, will implement for all future Personal
Injury Cases, except as noted below, an administrative compensation system to
replace judicial claims against the defendants, and will provide fair and
adequate compensation to future claimants who can demonstrate exposure to
asbestos-containing products manufactured by the defendants and the presence
of an asbestos-related disease. Class members will be given the opportunity
to "opt out," or elect to be excluded from the settlement, although the
defendants reserve the right to withdraw from the settlement if the number of
opt outs is, in their sole judgment, excessive. In addition, in each year a
limited number of claimants will have certain rights to prosecute their claims
for compensatory (but not punitive) damages in court in the event they reject
the compensation offered by the administrative processing of their claim.
The Center members, including U.S. Gypsum, have instituted proceedings against
those of their insurance carriers that had not consented to support the
settlement, seeking a declaratory judgment that the settlement is reasonable
and, therefore, that the carriers are obligated to fund their portion of it.
Consummation of the settlement is contingent upon, among other things, court
approval of the settlement and a favorable ruling in the declaratory judgment
proceedings against the non-consenting insurers. It is anticipated that
appeals will follow the district court's ruling on the fairness and
reasonableness of the settlement.
Each of the defendants has committed to fund a defined portion of the
settlement, up to a stated maximum amount, over the initial ten year period of
the agreement (which is automatically extended unless terminated by the
defendants). Taking into account the provisions of the settlement agreement
concerning the maximum number of claims that must be processed in each year
and the total amount to be made available to the claimants, the Center
estimates that U.S. Gypsum will be obligated to fund a maximum of
approximately $125 million of the class action settlement, exclusive of
expenses, with a maximum payment of less than $18 million in any single year;
of the total amount of U.S. Gypsum's obligation, all but approximately $7
million is expected to be paid by U.S. Gypsum's insurance carriers.
During 1991, approximately 13,100 Personal Injury Cases were filed against
U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum
incurred expenses of $15.1 million in 1991 with respect to Personal Injury
Cases of which $15.0 million was paid by insurance. During 1992,
approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and
approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses
of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5
million was paid by insurance. During 1993, approximately 26,900 Personal
Injury Cases were filed against U.S. Gypsum and approximately 22,900 were
settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in 1993
with respect to Personal Injury Cases of which $34.0 million was paid by
insurance. As of December 31, 1993, 1992, and 1991, approximately 59,000,
54,000, and 43,000 Personal Injury Cases were outstanding against U.S. Gypsum,
respectively.
U.S. Gypsum's average settlement cost for Personal Injury Cases over the past
three years has been approximately $1,600 per claim, exclusive of defense
costs. Management anticipates that its average settlement cost is likely to
increase due to such factors as the possible insolvency of co-defendants,
although this increase may be offset to some extent by other factors,
including the possibility for block settlements of large numbers of cases and
the apparent increase in the percentage of asbestos personal injury cases that
appear to have been brought by individuals with little or no physical
impairment. Through the Center, U.S. Gypsum has reached settlements on
approximately 26,700 pending Personal Injury Cases for an amount estimated at
approximately $32 million. These settlements will be consummated and the
cases closed over a three year period. In management's opinion, based
primarily upon U.S. Gypsum's experience in the Personal Injury Cases disposed
of to date and taking into consideration a number of uncertainties, it is
probable that all asbestos-related Personal Injury Cases pending against U.S.
Gypsum as of December 31, 1993, can be disposed of for a total amount,
including both indemnity costs and legal fees and expenses, estimated to be
between $100 million and $120 million (of which all but $2 million or $5
million, respectively, is expected to be paid by insurance). The estimated
cost of resolving pending claims takes into account, among other factors, (i)
an increase in the number of pending claims; (ii) the settlements of certain
large blocks of claims for higher per-case averages than have historically
been paid; (iii) the committed but unconsummated settlements described above;
and (iv) a small increase in U.S. Gypsum's historical settlement average.
Assuming that the Georgine class action settlement referred to above is
approved substantially in its current form, management estimates, based on
assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in
Personal Injury Cases during the next ten years (the initial term of the
agreement), including liability for pending claims and claims resolved as part
of the class action settlement, as well as defense costs and other expenses,
at approximately $262 million, of which approximately $250 million is expected
to be paid by insurance. U.S. Gypsum's additional exposure for claims filed
by persons who have opted out of Georgine would depend on the number of such
claims that are filed, which cannot presently be determined.
Coverage Action
As indicated above, all of U.S. Gypsum's carriers initially denied coverage
for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum
initiated the Coverage Action to establish its right to such coverage. U.S.
Gypsum has voluntarily dismissed the Supporting Insurers referred to above
from the personal injury portion of the Coverage Action because they are
committed to providing personal injury coverage in accordance with the
Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for
coverage for the Personal Injury Cases have been stayed since 1984.
On January 7, 1991, the trial court in the Coverage Action ruled on the
applicability of U.S. Gypsum's insurance policies to settlements and one
adverse judgment in eight Property Damage Cases. The court ruled that the
eight cases were generally covered, and imposed coverage obligations on
particular policy years based upon the dates when the presence of asbestos-
containing material was "first discovered" by the plaintiff in each case. The
court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum
to resolve the eight cases. U.S. Gypsum has appealed the court's ruling with
respect to the policy years available to cover particular claims, and the
carriers have appealed most other aspects of the court's ruling. The appeal
process is likely to take up to a year or more from the date of this report.
U.S. Gypsum's experience in the Property Damage Cases suggests that "first
discovery" dates in the eight cases referred to above (1978 through 1985) are
likely to be typical of most pending cases. U.S. Gypsum's total insurance
coverage for the years 1978 through 1984 is approximately $350 million (after
subtracting insolvencies and discounts given to settling carriers). However,
some pending cases, as well as some cases filed in the future, may be found to
have first discovery dates later than August 1, 1984, after which U.S.
Gypsum's insurance policies did not provide coverage for asbestos-related
claims. In addition, as described below, the first layer excess carrier for
the years 1980 through 1984 is insolvent and U.S. Gypsum may be required to
pay amounts otherwise covered by those and other insolvent policies.
Accordingly, if the court's ruling is affirmed, U.S. Gypsum will likely be
required to bear a portion of the cost of the property damage litigation.
Eight carriers, including two of the Supporting Insurers, have settled U.S.
Gypsum's claims for both property damage and personal injury coverage and have
been dismissed from the Coverage Action entirely. Four of these carriers have
agreed to pay all or a substantial portion of their policy limits to U.S.
Gypsum beginning in 1991 and continuing over the next four years. Three other
excess carriers, including the two settling Supporting Insurers, have agreed
to provide coverage for the Property Damage Cases and the Personal Injury
Cases subject to certain limitations and conditions, when and if underlying
primary and excess coverage is exhausted. It cannot presently be determined
when such coverage might be reached. Taking into account the above
settlements, including participation of certain of the settling carriers in
the Wellington Agreement, and consumption through December 31, 1993, carriers
providing a total of approximately $90 million of unexhausted insurance have
agreed, subject to the terms of the various settlement agreements, to cover
both Personal Injury Cases and Property Damage Cases. Carriers providing an
additional $250 million of coverage that was unexhausted as of December 31,
1993 have agreed to cover Personal Injury Cases under the Wellington
Agreement, but continue to contest coverage for Property Damage Cases and
remain defendants in the Coverage Action. U.S. Gypsum will continue to seek
negotiated resolutions with its carriers in order to minimize the expense and
delays of litigation.
Insolvency proceedings have been instituted against four of U.S. Gypsum's
insurance carriers. Midland Insurance Company, declared insolvent in 1986,
provided excess insurance ($4 million excess of $1 million excess of $500,000
primary in each policy year) from February 15, 1975 to February 15, 1978;
Transit Casualty Company, declared insolvent in 1985, provided excess
insurance ($15 million excess of $1 million primary in each policy year) from
August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared
insolvent in 1986, provided excess insurance ($10 million quota share of $25
million excess of $90 million) from August 1, 1983 to July 31, 1984; and
American Mutual Insurance Company, declared insolvent in 1989, provided the
primary layer of insurance ($500,000 per year) from February 1, 1963 to April
15, 1971. It is possible that U.S. Gypsum will be required to pay a presently
indeterminable portion of the costs that would otherwise have been covered by
these policies. In addition, portions of various policies issued by Lloyd's
and other London market companies between 1966 and 1979 have also become
insolvent; under the Wellington Agreement, U.S. Gypsum must pay these
amounts, which total approximately $12 million.
It is not possible to predict the number of additional lawsuits alleging
asbestos-related claims that may be filed against U.S. Gypsum. The number of
Personal Injury Cases pending against U.S. Gypsum has increased in each of the
last several years. In addition, many Property Damage Cases are still at an
early stage and the potential liability therefrom is consequently uncertain.
In view of the limited insurance funding currently available for the Property
Damage Cases resulting from the continued resistance by a number of U.S.
Gypsum's insurers to providing coverage, the effect of the asbestos litigation
on the Corporation will depend upon a variety of factors, including the
damages sought in the Property Damage Cases that reach trial prior to the
completion of the Coverage Action, U.S. Gypsum's ability to successfully
defend or settle such cases, and the resolution of the Coverage Action. As a
result, management is unable to determine whether an adverse outcome in the
asbestos litigation will have a material adverse effect on the results of
operations or the consolidated financial position of the Corporation.
Accounting Change
Effective January 1, 1994, the Corporation adopted the requirements of
Financial Accounting Standards Board Interpretation No. 39. In accordance
with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million
for its liabilities for asbestos-related matters which are deemed probable and
can be reasonably estimated, and separately recorded an asset of $100 million,
the amount of such liabilities that is expected to be paid by uncontested
insurance. Due to management's inability to reasonably estimate U.S. Gypsum's
liability for Property Damage Cases and (until the implementation of Georgine
is deemed probable) future Personal Injury Cases, the liability and asset
recorded in 1994 relate only to pending Personal Injury Cases. The
implementation of Interpretation No. 39 did not impact earnings, cash flow or
net assets.
Environmental Litigation
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as one
of numerous "potentially responsible parties" in a number of so-called
"Superfund" sites in the United States. In substantially all of these sites,
the involvement of the Corporation or its Subsidiaries is expected to be
minimal. The Corporation believes that appropriate reserves have been
established for its potential liability in connection with all Superfund sites
but is continuing to review its accruals as additional information becomes
available. Such reserves take into account all known or estimable costs
associated with these sites including site investigations and feasibility
costs, site cleanup and remediation, legal costs, and fines and penalties, if
any. In addition, environmental costs connected with site cleanups on USG-
owned property are also covered by reserves established in accordance with the
foregoing. The Corporation believes that neither these matters nor any other
known governmental proceeding regarding environmental matters will have a
material adverse effect upon its earnings or consolidated financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) (15) Letter of Arthur Andersen & Co. regarding unaudited financial
information.
(b) There were no reports on Form 8-K filed during the first quarter of
1994.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ Dean H. Goossen
Dean H. Goossen, Corporate Secretary,
USG Corporation
May 12, 1994 By /s/ Raymond T. Belz
Raymond T. Belz, Vice President and
Controller, USG Corporation
Exhibit (15)
May 12, 1994
USG Corporation
125 South Franklin Street
Chicago, Illinois 60606
Gentlemen:
We are aware that USG Corporation has incorporated by reference into
previously filed Registration Statement Numbers 33-22581, 33-22930, 33-36303,
33-40136 and 33-63554 its Form 10-Q for the quarter ended March 31, 1994,
which includes our report dated April 22, 1994, covering the unaudited
condensed financial information contained therein. Pursuant to Regulation C
of the Securities Act of 1933, these reports are not considered a part of the
registration statement prepared or certified by our firm or reports prepared
or certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
